La década de los setenta, un periodo de “eclosión de modelos” de evaluación 53

(Irpef, i.e. Imposta sul reddito delle persone fisiche) that have taken place in Italy over the last few years. These changes were inspired by very different intellectual benchmarks, but none of them has come close to a complete and consistent reform. They are mainly partial attempts that have left the most important component of the Italian tax system in what is now an uncertain and unstable equilibrium.

The starting point of our analysis is the structure that Irpef had before all the reforms we simulate. Since the first of them come into force in the fiscal year 2003, we must adopt as a base case for our simulations the characteristics of Irpef in 2002. Here we sketch the main traits of the personal income tax before and after each of the reforms.

4.2.1. Irpef 2002

During the fiscal year 2002, the individual taxable income is subject to five brack- ets, with the lowest rate at 18% and the highest at 45% (starting from 70,000 euros). Progressivity is realised also through a series of tax credits, all piecewise decreasing with respect to income, so as to further strengthen the rise in the ef- fective average tax rate: for dependent spouse, for children (starting at about 500 euros for each child for middle-low income levels), for dependent workers and pen- sioners (decreasing with respect to income from 1,150 to 52 euros), and for the self-employed (from 573 to 52 euros). The presence of these tax credits produces a minimum level of income that is exempt from the tax. This no-tax area corre- sponds to 6,200 euros for dependent workers and pensioners, and to 3,100 euros for independent workers.

4.2.2. Irpef 2003

The first of the two reforms operated by the centre-right government became ef- fective in the fiscal year 2003. The number of rates was maintained at 5, but with changes in the first three rates. This reform had effects for low and middle incomes, and replaced the tax credits for earned incomes and pensions with deduc- tions. The tax credits for dependent family members were maintained. The new deductions had therefore the main aim of guaranteeing a no-tax area, whose levels were also raised from 6,200 to 7,500 euros for dependent workers, from 6,200 to

4.2. The recent evolution of the Italian personal income tax

7,000 for pensioners, and from 3,100 to 4,500 euros for the self-employed. To fur- ther enhance the progressivity effect, the tax deductions were defined as a linearly inverse function of income, falling to zero for incomes greater than 33,500 euros for dependent workers, 30,500 for the self-employed and 33,000 for pensioners. The reduction in tax revenue from these changes has been estimated in 6 billions euros.

4.2.3. Irpef 2005

The second module of reform accomplished by the centre-right government re- placed also the family-related tax credits with deductions (linearly decreasing with income like the no-tax area deductions) and reduced the number of brackets from 5 to 4. The highest tax rate has been cut by two percentage points, from 45% to 43%. This top rate applies to the income share exceeding 100,000 euros. Under Irpef 2003, the 45% rate applied instead to incomes starting from 70,000 euros. While the 2003 reform benefited middle and low incomes, this reform provided tax rebates for the highest deciles of the income distribution.

The reduction of the top rate and its application to a narrower bracket were steps that the government took along a path that had, as a final objective, a structure of the personal income tax based on only two brackets: the first one up to 100,000 euros, taxed at 23%, and the rest subject to the 33% rate. Progressivity would have been further enhanced by a deduction decreasing with income. The intellectual reference point of the whole reform action of the centre-right government in this context is clearly the flat-rate tax, with a limited degree of progressivity and the application of the same legal tax rate (23%) to the great majority of taxpayers. The cost of this second piece of reform has been broadly similar to that of the first one, around 6 billion euros.

4.2.4. Irpef 2007

The flat-tax plan could not be completed because of fears of excessive revenue losses, and above all because the objective of a two-rate scheme was not shared by the centre-left government that took power in 2006. In the budget law for 2007 the new coalition introduced a deep change in the structure of the personal income tax, which is still basically effective. The top rate has been kept at 43%, but now applies to incomes above 75,000 euros. The main deductions have been replaced by tax credits, all linearly decreasing with respect to income. Formal tax rates

have been reduced for middle-low incomes, but raised for those earning more than 40,000 euros (or more, if the taxpayer has dependent family members). Unlike the two previous reforms, this one accounted for a deep restructuring in cash transfers for households with children (Assegno al nucleo familiare). Before the reform, this benefit decreased in a piecewise way with respect to family income, therefore producing high marginal effective tax rates and risks of poverty traps. Now its amounts have been increased, and its structure is linearly decreasing with respect to family income.

According to official estimates, this complex reform has had a very limited cost: the reduction of the tax burden and the rise in family benefits for middle and low incomes have been financed by taxpayers with higher incomes or without children. The intellectual paradigm of the centre-left coalition was completely different from that of the preceding government: the Prodi government tried to move the first steps towards a negative income tax scheme, integrating together in a consistent scheme the personal income tax and cash transfers to families with children, so as to guarantee an income support to taxpayers with family burdens and low incomes. This objective, however, had a life even shorter than the flat-rate tax scheme, given the rapid fall of the government and its replacement with a new centre-right coalition, in power since May 2008. The new government has not introduced any relevant modification in the personal income tax so far.